Rich Dad, Poor Dad

27 Apr, 2018 | Book Notes, Personal Finance

This is a great primer on how to think about creating wealth on a personal basis.

Whilst it focuses on high-level strategy, it offers good insights on why building assets over time is the key to wealth. Written in an easy-to-read and persuasive manner, it is light on technical details about actually making investment decisions (e.g. which stock to pick, what house to invest in). I’d recommend this strongly to anyone who is just beginning to think and learn about money management.

Rating - 8.5/10

View on Amazon here: Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!

You can view my other book notes, ratings and recommendations on my books page.


Financial education is not taught in school. Typically, it is taught by parents. Crucially, becoming financially literate is how one can accumulate wealth.

The Rich Don’t Work For Money

A key principle is to make money work for you, rather than you work for money. We study financial literacy so that we can make money work for us. What does this mean?

People are typically sucked into the Rat Race. The Rat Race is fuelled by fear and greed. Fear of being poor pushes us to take a job. And greed for more enables us to accept small raises which satisfy us just enough to keep us in the job. And this becomes a cycle. People allow these emotions to drive them rather than admitting the situation is dissatisfying and using their head to do something about it.

Everyone has a desire for money. Or a desire for things that money can buy. This is natural. People often deny this, yet they work jobs for 40 hours a week. The person who doesn’t care about money is as irrational as the person who cares too much. Failing to educate yourself about money is ignorant. So one should take the responsibility to do so.

Robert discusses the requirement to have a 'burning desire' to make money which is the theme of a whole chapter in Think And Grow Rich.

But the emotions of fear and greed, the rat race, can prevent us from seeing opportunities. And opportunities are the real source of wealth creation. So the rich work to see opportunities to make money work for them.

Why Become Financially Literate?

Understanding money takes time to learn. But it is an investment in your skills and knowledge or your educational wealth. The economy is sure to go through several booms and busts and it is your educational wealth that will preserve or increase your wealth throughout these.

KISS Principle (Keep it simple, stupid)

The rich buy assets. The poor buy liabilities. Defining these things simply:

  • Assets - Something that puts money in your pocket. e.g. A rented property, an increasing stockholding.
  • Liabilities - Something that takes money out your pocket. e.g. A monthly car fee. Spotify debit.

These definitions are Robert's, rather than dictionary definitions. They do help to make clear distinctions though. For example, is a house an asset or a liability? Well, it depends. It is an asset if you own it fully and rent it out. It puts money in your pocket. But if you have a mortgage or are renting accommodation, it's a liability. (Ramit considers property a high-risk purchase - see I Will Teach You To Be Rich.)

In order to demonstrate this further, we can employ a balance sheet. A balance sheet shows the balance of someone’s assets to their liabilities. An income statement shows someone’s income against their expenses.

Demonstrating the cash flow through an individual’s balance sheet to their income statement is really important to understand how someone generates wealth.

income statement balance sheet

Rich people accumulate assets which feed their income. Poor people accumulate assets which feed their expenses. If people have this flow wrong (buying liabilities instead of assets) having more earning actually exacerbates the problem, rather than solving it.

What prevents people from becoming rich is less often the salary they make, but rather how they spend that salary (on liabilities rather than assets).

The Rich Cycle

Rich people continually build, buy or create assets. This, in turn, feeds their income, which in turn can be used to re-invest in more assets. The first milestone is to try have enough assets to completely offset liabilities. Then you can continue to add more, diversifying your assets and experimenting with riskier investments.

When we ask what is someone’s wealth, we are measuring their revenue-generating assets vs their liabilities. This is the measure of someone’s financial runway; how many months they could survive before their bank account would hit 0. If you have assets way and above your liabilities, you will have a long runway.

The path to complete financial freedom looks like so:

  1. Earn a salary so that you can cover expenses
  2. Build assets that generate income (in addition to your salary) that can support expenses
  3. Over time, add more assets so that eventually all your expenses can be supported by income from assets. At this stage, you can forgo your salary if you want to (leave job, retire, etc).
  4. Continually re-invest any extra income into assets so that your income continues to grow above and beyond your expenses and liabilities.

Minding Your Own Business

We should all make a distinction between our profession and our business. You profession revolves around your income statement and says what you do for a living e.g. a banker, a coder. But your business revolves around your balance sheet and describes how you manage your assets. Rich people focus on how they acquire assets.

Assets include:

  • a business that makes a profit and doesn’t require your presence (or many hours)
  • Stocks, shares and bonds
  • Income-generating real estate
  • Intellectual property, rights or royalties


Taxes initially came about in order for empires of the past to fund wars in the name of expansion. But now they are a regular part of all contemporary societies.

A breif history of taxes (and money) was included in Sapiens.

The rich have learned how to manage tax. Through cooperations you can save tax:

  1. In general, corp tax is lower than income tax.
  2. In corporations, you can deduct some costs pre-tax (so as a % the amount lost is smaller).

So as you begin to build your assets you might want to think about incorporating in order to reduce your tax bill.

Is corporation tax always lower than personal income tax? Does this not depend on country, time, government, etc.

Financial Skills

What skills are needed to be financially literate?

  1. Accounting - Understand the story behind numbers.
  2. Investing - Deciding to make your money work for you.
  3. Markets - Understand supply, demand and human behaviour in order to choose good investments.
  4. Law - In order to limit your taxes and liabilities (e.g. Rich man doesn’t own anything but a company that owns everything).

Seizing investment opportunities

Years ago, wealth creation was in land. Then in industry. Then in information. Now in capital allocation and scaling technology. The point is that change is inevitable and opportunities arise out of that. It’s important to stay humble and continually learn in light of these changes.

Money tends to flow to those who are willing to take a little risk. The excitement of winning should outweigh the fear of losing money or criticism.

Generally, there are two types of investors:

  1. Buys only pre-packages investments - safer, but never likely to win big.
  2. Someone who is willing to create investments - requires mental flexibility and slightly more risky, but with bigger returns.

What does it take to create investment opportunities?

  1. Spot opportunities others have missed.
  2. Raise money to leverage against those.
  3. Organise smart people.

The important takeaway here is that rich people are willing to take some risk in order to make a gain. This means you have to manage your emotions and your fears in order to do so.

Think And Grow Rich also discusses the management of fears in order take risk and achieve progress. Tim Ferriss' fear-setting technique springs to mind.

Work To Learn

It’s amazing how many skilled people earn little money. This is because the world doesn’t simply reward hard work, it rewards seizing opportunities. Schools tend to suggest that specialisation in a single skill is important. But often knowing a few different skills can help people seize opportunities. For example, a software developer can be a good employee. But a software developer who can also sell and market themselves could be a great founder.

So ask yourself, when you take on a new job, what skills will you learn from it? If you can always be learning new skills this can only be a good thing. Especially if they help you to seize new opportunities. The skills which he recommends learning from jobs:

  1. Managing cash flow.
  2. Managing systems.
  3. Managing people.

Overcoming Obstacles

There are a few common fears that might get in the way of success.

Fear of poverty

The fear of losing money is real. But so is a fear of spiders. The key is how we deal with that. If you know you are more risk-averse, then you should start investing earlier, allowing your lower yield investments to build over more time.

Our "monkey-mind" is real! We need to step out of our animal brain and rationally observe when our fears may be misplaced.

But also remember that in order to make a return, you need to be prepared to lose some money. In the same way that a basketball player must be prepared to miss, in order to score the winning points.

You can also alleviate some fears by spreading risk or diversifying. Although remember, by de-risking you are also limiting your returns. You could also F.O.C.U.S (follow one course until successful). This means being highly invested in one area for a long period7.

The balance between focused investments and diversification is everpresent in money books. Whilst Robert's preference in this book seemed to be on a more focused strategy (property) other authors promote a highly diversified strategy (e.g. I Will Teach You To Be Rich).


Many people buy into doom and gloom that they are not informed about. Make sure to do your own research and not just follow the herd.

Overcoming laziness

People are constantly busying themselves. What takes courage is to make a decision to stop being busy and prioritising the actions that will mean you never have to be busy ever again.

Overcoming arrogance

We must remain humble and keep learning. Pretending we know everything and investing in areas we know nothing about is a fast way to lose money.

Tips on getting started:

  • Have a deep reason to be financially literate. What are your wants and desires?
  • Make your own choices. Choose every day to make better financial decisions.
  • Choose friends carefully. Friends who talk about money, become money smart. Friends can also be a source of intelligence, information and capital.
  • Learn fast and always be investing in yourself.
  • Self-discipline. Learn how to manage cash flow, people and your own time.
  • Understand the power of information. For example, treat your broker well as they should get you on the best deals before others do.
  • Only buy luxuries that you have assets to cover. Don’t increase expenses without good reason.
  • Have heroes and mentors who you can look up to and learn from.
  • Teach others. The world is governed by reciprocity so first give freely.

Robert's discussion of heroes reminded me a lot of the Master Mind principle chapter in Think And Grow Rich - having a board of people who you can lean on for wisdom and guidance.

Final Words

In accounting, there are only three types of income:

  1. Ordinary earned income
  2. Portfolio income
  3. Passive income

Poor people have only ordinary earned income. Rich people focus on the other two. The secret to building wealth is how quickly you can turn 1 into 2 or 3.

Each of us has our mind and our time. Use these successfully with the above principles and in time you can become very wealthy.
